Chart Fest

Ben 'Helicopter' Bernanke Left Holding The Bag

This morning Wal-Mart is providing just enough ammunition to inspire an oversold, short covering bounce.

Wal-Mart Profit Rises After It Offers More Discounts (Update2): “Wal-Mart Stores Inc., the world's largest retailer, said quarterly profit rose more than analysts estimated and boosted its full-year earnings forecast after luring customers with holiday discounts.

Wal-Mart shares rose 3.3 percent in early U.S. trading.”

Don’t let the ‘good’ numbers from Wal-Mart fool you. They are the product of MASSIVE and EARLY price cuts.

Home Depot Has Profit Decline on U.S. Housing Slump (Update3): “Home Depot Inc., the largest home- improvement retailer, reported lower profit and cut its full- year earnings forecast after the U.S. housing slump reduced sales of kitchen cabinets and appliances.

Home Depot said it will take a “cautious stance” on completing its $22.5 billion share buyback because of the volatility of credit markets and housing sales. Third-quarter revenue of $19 billion missed the $19.3 billion average estimate of analysts in a Bloomberg survey.

Chief Executive Officer Frank Blake is spending more than $2 billion this year to improve customer service and the appearance of stores in a bid to reverse market-share losses to Lowe's Cos. Sales have declined for two straight quarters amid the worst housing slump in more than a decade.”

Legg Mason, SunTrust Shore Up Money Funds for SIVs (Update2): “Mason Inc. and SunTrust Banks Inc. are propping up money-market funds to cushion them from possible losses on debt issued by structured investment vehicles.

Legg Mason invested $100 million in one of its money funds and arranged $238 million in credit for two others, the Baltimore-based company said in a Nov. 9 regulatory filing. SunTrust Banks Inc. received approval from regulators last month to protect two money funds that bought debt from Cheyne Finance Plc if the SIV is unable to repay the Atlanta-based bank.

The 10 largest managers of U.S. money funds have $50 billion in SIV debt, some issued by vehicles such as Cheyne that defaulted because of losses from securities linked to subprime mortgages, according to reports from the companies. At least four companies -- Legg Mason, SunTrust, SEI Investments Co. and Wachovia Corp. of Charlotte, North Carolina -- have stepped in to make sure their funds don't “break the buck,” or fall below the $1 a share net asset value that all funds seek to maintain.

“This is the first real case” of securities held by money-market funds defaulting, said Peter Crane, founder of Crane Data LLC, the Westborough, Massachusetts-based publisher of the Money Fund Intelligence Newsletter.”

I don’t like hearing the words ‘propping up’ and ‘money market funds’ in the same sentence. There will be more that will ‘break the buck’ only to be quickly and quietly ‘propped up’.

German Investor Confidence Drops to 15-Year Low (Update2): “German investor confidence dropped to the lowest in almost 15 years in November after the euro reached a record and the price of oil neared $100 a barrel.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations fell to minus 32.5, the lowest since February 1993, from minus 18.1 in October. Economists expected a decline to minus 20, according to the median of 38 forecasts in a Bloomberg News survey.

Growth in Europe's biggest economy will probably slow, ZEW said. The euro has risen 8 percent against the dollar in the past three months and reached a record $1.4752 last week, eroding the competitiveness of German exports. At the same time, higher energy bills have sapped companies' and consumers' spending power.”

Do not expect the rest of the world to make up any slack from the US economy. In Europe at least their economies have very similar problems to those of the US economy.

China's October Inflation Matches Decade High of 6.5% (Update4): “Inflation in China, the world's fastest-growing major economy, accelerated in October as food prices jumped, increasing pressure on the central bank to raise interest rates for a sixth time this year.

Consumer prices rose 6.5 percent from a year earlier, matching the decade high in August, the National Bureau of Statistics said today, after gaining 6.2 percent in September. That was more than the 6.3 percent median estimate of 20 economists surveyed by Bloomberg News.

Pork prices jumped 55 percent, vegetable costs were up almost 30 percent and three people were killed last week in a stampede for cooking oil in Chongqing. Rising food costs threaten to fan unrest, spur wage demands and undermine the stability of an economy that grew 11.5 percent in the third quarter.”

China is starting to lose control over inflation. At this point, any action would have to fairly drastic. Significant rate hikes and bank reserve increases. It does not appear that the political leadership currently has the will to test the wrath of the people...

Investors Shred Bernanke's Outlook, Bet on Rate Cut (Update2): “Federal Reserve Chairman Ben S. Bernanke failed to convince investors that there's no need for further interest-rate cuts soon.”

Another cut won’t help. It would simply light a fire under crude and gold while destroying the dollar. The result would be higher long rates and massive import price inflation.

Looks like Alan ‘The Maestro’ Greenspan knew exactly when to exit the world stage, leaving Ben ‘Helicopter’ Bernanke holding the bag. Well played. Well played.

Oversold, Short Covering Bounce

Time for an oversold, short covering bounce...

Banks Agree on Super SIV

Yen Rises to 1 1/2-Year High Against Dollar on Risk Reduction: “The yen strengthened against all 16 of the most-traded currencies, rising beyond 110 per dollar for the first time in 1 1/2 years, as investors reduced holdings of higher-yielding assets bought with loans in Japan.

The currency rose as much as 4.5 percent versus the Australian dollar and 2.2 percent against the euro as speculators retreated from so-called carry trades. Investors cut holdings of riskier assets after Morgan Stanley analysts downgraded HSBC Holdings Plc because of mortgage defaults and Deutsche Bank AG estimated that losses from falling values of subprime mortgages may reach $400 billion worldwide.

“We've seen the carry trade unwind on credit-market concerns,” said Sue Trinh, a senior currency strategist in Sydney with RBC Capital Markets, the most accurate forecaster of the yen's value against the euro in the second quarter, according to data compiled by Bloomberg. “The big beneficiary at the moment is the yen.””

The unwind continues… and may have accelerated to the point of being worthy of an oversold bounce over the next few trading days.

Subprime Losses May Reach $400 Billion, Analysts Say (Update4): “Losses from the falling value of subprime mortgage assets may reach $300 billion to $400 billion worldwide, Deutsche Bank AG analysts said.

Wall Street's largest banks and brokers will be forced to write down as much as $130 billion because of the slump in subprime-related debt, according to a report today by Mike Mayo, a New York-based analyst. The rest of the losses will come from smaller banks and investors in mortgage-related securities.

Citigroup Inc., Merrill Lynch & Co. and Morgan Stanley led more than $40 billion of writedowns of assets as record U.S. foreclosures plundered asset prices. About $1.2 trillion of the $10 trillion of outstanding U.S. home loans are considered to be subprime, Mayo said in the note.”

I haven’t heard contained in a while…

“Deutsche Bank expects 30 percent to 40 percent of subprime debt to default. Losses on loans to people with poor credit histories may be as much as half the sum lent, Mayo wrote. The forecasts on total writedowns are based on “seat-of-the-pants” estimates using losses announced by the biggest securities firms, he said.

Banks and brokers may have to write off $60 billion to $70 billion this year, Mayo wrote. The estimate is based on known charges of $43 billion and expected additional losses of $25 billion. The report didn't include writedowns at Frankfurt-based Deutsche Bank, which were 2.16 billion euros ($3.15 billion) in the third quarter.

Loss rates on about $200 billion of securities based on derivatives linked to subprime debt will run to as high as 80 percent, Mayo wrote.

Estimates of losses have soared this year as defaults and foreclosures increased.”

No surprises here.

Citigroup, Banks Agree on `Super-SIV,' Person Says (Update3): “Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co., the three largest U.S. banks, reached an agreement on the structure of an $80 billion fund to help revive the market for short-term debt, a person familiar with the talks said yesterday.

Bankers working on the deal met at Bank of America's offices in New York on Nov. 9 and settled on a simpler plan than initially proposed last month, according to the person, who declined to be named because the agreement isn't public. Under the original initiative brokered by Treasury Secretary Henry Paulson, the fund would buy some of the $320 billion in assets held by so-called structured-investment vehicles, known as SIVs.

The banks are pushing to have the fund in place by year-end because SIVs are unable to get short-term credit to finance their higher-yielding investments as losses on subprime mortgages drive investors from all but the safest government debt. The plan still has to win the confidence of investors amid forecasts from Deutsche Bank AG analysts today that losses related to subprime mortgages may reach $400 billion worldwide.

“The whole thing is flawed,” said Graham Fisher & Co. managing director Josh Rosner, whose New York-based firm analyzes structured finance and real estate investments. “As opposed to recognizing losses, we're trying to roll those losses into the future, regardless of the sanity or safety and soundness of doing that.””

More news on the Super SIV is expected over the course of this week. Thus far, the credit and broader equity markets aren’t exactly inspired by these developments.

“The asset-backed commercial paper market has been shrinking for 13 straight weeks in the U.S. and last week declined the most in two months. Debt maturing in 270 days or less and backed by mortgages, credit-card loans and other assets fell $29.5 billion, or 3.4 percent, to a seasonally adjusted $845.2 billion for the week ended Nov. 7, according to the Federal Reserve in Washington.

SIV assets have dwindled by at least $75 billion since July as the companies struggled to raise short-term debt, according to data compiled by Bloomberg. The net asset value of SIVs has fallen to 71 percent of initial capital from 102 percent in June, Moody's Investors Service said last week. Net asset value measures the difference between SIV assets and liabilities, expressed as a percentage of its capital.”

Goldman Held Bigger Share of Level 3 Assets Than Citi, Merrill: “Goldman Sachs Group Inc. held a bigger proportion of hard-to-value assets at the end of the third quarter than Citigroup Inc. and Merrill Lynch & Co., two of the firms hardest hit by subprime mortgage losses.

Goldman's Level 3 assets, for which market prices are so scarce that companies use internal models to gauge their value, accounted for 6.9 percent of the New York-based firm's $1.05 trillion total at the end of August, according to a filing with the U.S. Securities and Exchange Commission. Citigroup classified 5.7 percent of its assets as Level 3 on Sept. 30 and Merrill reported 2.5 percent.

Investors have grown wary of banks and brokerages with difficult-to-sell securities on their books, after profits at Citigroup and Merrill were crippled by at least $19 billion of writedowns, mostly from bonds backed by home loans to borrowers with poor credit histories. While Goldman officials say the firm won't report an “extraordinary” drop in its subprime holdings, investors have remained skeptical, pushing its shares down 15 percent this month in New York Stock Exchange trading.

“It's hard to believe Goldman is perfect,”said Jon Fisher, who helps oversee $22 billion at Minneapolis-based Fifth Third Asset Management and sold his Goldman, Merrill and Morgan Stanley shares in the past 12 months. “Their losses might be smaller than others, but that doesn't mean they don't have a problem.””

I doubt even that their losses are smaller than others. I bet Goldman has just been better at postponing the loses than others.

$100 Oil May Mean Recession as U.S. Economy Hits `Danger Zone': “Rising fuel prices that businesses and consumers took in stride earlier this year may now be near the point of pushing the weakened U.S. economy into recession.

“We are in a danger zone,” says Nariman Behravesh, chief economist at Global Insight Inc. and a former Federal Reserve economist. “It would take two shocks to bring the economy to its knees. We got one shock in the form of the credit crunch. Oil could be that second shock.”

Crude-oil prices are poised to cross the $100-a-barrel mark while the U.S. economy is still reeling from a surge in corporate borrowing costs. Europe and Japan are vulnerable as well, after the U.S. subprime-mortgage collapse contaminated their credit markets.

Even before the latest jump in energy costs, economists expected U.S. growth to slow to less than 2 percent in the fourth quarter -- half the third quarter's pace. Andrew Cates, an economist at UBS AG in London, said his models suggest a 45 percent chance of a U.S. recession next year, up from 33 percent last month, as oil prices prove a “growing concern.”

Japan risks its fourth recession since the early 1990s, with its index of leading economic indicators falling to zero for the first time in a decade. The European Commission last week cut its 2008 growth forecast for the 13 nations that share the euro to 2.2 percent from 2.5 percent, partly because of costlier crude. The economy grew 2.8 percent last year.”

In the US the signs of slowdown are starting to spread as well.

“In the U.S., the Institute for Supply Management's manufacturing index fell to a seven-month low in October as gauges of orders and production declined.”